Toronto Real Estate

Having lived in Toronto for many years I have often wondered what is driving the real estate market to ever greater heights. We are now in the tenth year of a five-year cycle. Many have been waiting for the other shoe to drop on real estate prices and it fails to do so. Here is an article that tries to offer an explanation that is totally self-serving. Of course, the subject matter is developed by a real estate agent.

What’s He Saying

It’s the same old deal. Investors are flocking to Canada because of its political stability and stable/growing real estate market. Millenials are flocking downtown. It’s all going the right way.

There is no mention of the historically low interest rates that have fueled the speculation in real estate prices. There is no mention of the games that the banks play in order to provide cheap mortgage financing to residential home buyers. There is no mention that millennials need to buy closets to live in or pay ridiculous rents.

I had a look at the size of the units in some prestige buildings. They are around 500 square feet which are basically a large closet. And in these units, they will divide it up into two bedroom apartments.

There is no mention of the high land servicing costs in the Greater Toronto Area. These high land servicing costs keep housing prices higher than they should be.

These are all well-researched topics.

The Foreigners

The foreigners are applauded for coming here and driving real estate prices higher as “absentee landlords”. There is no way of tracking the money coming in so no one knows if it’s being laundered through this safe haven. And how can these foreign investors manage to bear the rather significant foreign exchange losses that they have likely suffered as a result of the weak Canadian dollar over the last few years?

The Government of Canada has thrown middle-class Canadians under the bus for some unspecified agenda to allow the pricing of Toronto and Vancouver real estate to get completely and wildly out of control. Affordability is being stretched to new limits.

This comes from the Toronto-Dominion Bank:

There is little debate that Canada’s hottest housing markets are ripe for a correction; the difficulty is predicting its timing. Over the second half of 2016, some moderation in resale activity and price growth should become evident as bond yields pull off their lows and stretched affordability leads to a cooling in domestic and foreign housing demand. However, barring significant new government regulatory measures to curb housing market speculation later this year, more concrete signs of a housing market slowdown are unlikely to be seen until 2017. Even then, there tends to be a lag before weaker resale demand translates into a moderation in building activity.

You’ll notice the muted tone of this comment. It has a sort of don’t worry, be happy tone to it. Nothing serious. Just by the way. Typical Canadian portrayal of a dire situation. It’s not a real problem, it will work its way through.

What’s My Conclusion

I’m no expert by any stretch. I just know what I see. And what I see is million dollar houses being purchased by people that are extending themselves to buy them. When you use any of the mortgage calculators provided by the Canadian banks you can begin to see how tight things get when interest rates start to inch up. It would seem that the reserves of many are non-existent. So only moderate increases in interest rates will likely push borrowers to the limit.

Few around today remember the precipitous declines in real estate prices of days gone by. Houses that would not sell, homes under power of sale. Homeowners ruined by the drop in real estate prices wiping out their paper thin equity. I hope it doesn’t happen again, but history does have a tendency to repeat itself.

In the meanwhile, the Canadian federal government has remained silent in the face of all this. Their silence speaks volumes in that they really have no plan to deal with this. No solutions to offer the Canadian public. Just more of the same anemic economic policies that have perpetuated the stagnation of middle-class incomes. This has been replaced with the dream of a tax-free windfall on your principal residence to bail you out when you retire.

I have no solution other than an increase in supply. But where to put that supply? Further and further way from the downtown core seems to create new problems (lack of public transit and infrastructure). More to come on this incredibly interesting topic. Does this in the end tie back to living a minimalist life style?